Effects Of Moral Hazard Research Articles

An Unusual View Of Health Economics

An Unusual View Of Health Economics

James Anderson, Development Economist: a cautionary tale

James Anderson, 1739–1808, analysed the relatively backward and underdeveloped Scottish economy of his time. Anderson stressed the crucial importance of externalities and the adverse developmental effects of moral hazard and considered active intervention, such that the forces of self‐interest are allowed positive play, to be essential to the development process. His approach and analysis are compared with those of Sir James Steuart, John Rae, and Adam Smith and the classical school. It is argued that Anderson’s analysis is of relevance today, and he was more objective in his approach than was Adam Smith and his followers.

On the Long Run Implications of Repeated Moral Hazard

This paper analyzes the effects of moral hazard on long-run consumption or utility. Given exponential utility, it is shown that the utility of those with unobservable endowments becomes arbitrarily negative as long as any positive fraction of otherwise identical agents have observable endowments. Next, it is shown that assuming a finite number of agents results in essentially the same outcomes as with a continuum of agents. Finally, it is shown that the key characteristic determining whether the utility of almost all agents becomes arbitrarily low is whether limc→∞U′(c) is bounded away from zero.Journal of Economic LiteratureClassification Numbers: D30; D31; D80; D82.

The effects of moral hazard on asset prices when financial markets are complete

This paper discusses the implications for prices and quantities of an alternative trading arrangement in Kahn's (1990) economic environment with moral hazard. Unlike Kahn's model of asset trade, my model does not impose any unmotivated restrictions on short sales. Instead, it features complete markets and publicly observable asset transactions. Like Kahn's model, my model implies that allocations are (constrained) Pareto optimal. However, the implications of my model for asset prices are considerably different. In particular, when all agents have log utility, asset prices satisfy an aggregation theorem; also, unlike Kahn's model, the model in this paper does worse than the standard representative agent model in terms of explaining the equity premium.

Moral Hazard, Ethical Considerations, and the Decision to Implement an Information System

:A decision-making study was conducted to examine the effects of moral hazard on information systems (IS) professionals’ decisions whether or not to implement a system with quality problems. Moral hazard was defined as an incentive to act in one’s self-interest in conflict with the organization’s overall goals while being able to hide those actions through privately held information. Highly experienced IS professionals provided responses to a hypothetical decision case that revealed a tendency to implement a project with quality problems in a moral hazard situation. Their decisions, however, were strongly influenced by ethical considerations. These findings suggest that key economic constructs, such as moral hazard, apply to system implementation contexts. They also suggest that organizations can significantly moderate self-interested behavior by fostering an ethical climate.

Moral hazard and contractibility in investment decisions

This paper uses a principal-agent framework to study the incentive effects of contractibility and moral hazard at the first stage of a two-stage investment decision. We show that when the intermediate signal is publicly observable and contractible, there is overinvestment (relative to the first-best) in second-stage production, purely for incentive reasons. However, if the intermediate signal cannot be contracted on and, in addition, the agent and the principal are permitted to act opportunistically, the optimal delegated investment decision is to underinvest. We discuss the implications of our analysis for the literature on costly monitoring.

Permanent Partial Disability in Workers' Compensation: Probability and Costs

Introduction Workers' compensation costs, as a percentage of covered payroll, have more than doubled since 1960, rising from 0.93 percent in that year to 2.15 percent in 1988. These increased costs have been attributed to changes in workers' compensation programs following the 1972 report of the National Commission of State Workmen's Compensation Laws, which criticized program benefits as inadequate.(1) Among other things, states responded to this report by increasing indemnity benefits and reducing the waiting period prior to benefit eligibility. In addition to the direct effect of such changes, a number of studies have found that liberalization of benefits increased program utilization. Specifically, several studies have found that higher compensation benefits are associated with higher claims incidence and longer durations of temporary total disability--the period of disability occurring prior to the point of maximum medical improvement (see Krueger, 1990a, and Ehrenberg, 1988, for recent reviews of the literature). A substantial portion of the increased cost of workers' compensation may be due to higher permanent partial disability costs. Permanent partial disability benefits represent approximately two-thirds of the total cost of workers' compensation benefits. In addition, while the incidence of permanent partial disability claims as a portion of total claims declined from a high of 26 percent in 1958 to 24 percent in 1982, the portion of total benefits attributable to permanent partial disability claims rose from 60 percent to 65 percent during that same period (Berkowitz and Burton, 1987). Krueger and Burton (1990) have shown that permanent partial disability benefits are an important determinant of overall program cost; that is, employer premiums are positively related to the proportion of total benefits accounted for by permanent partial compensation. Policy-makers have become increasingly concerned with permanent partial disability as overall costs have risen. Berkowitz and Burton (1987) have argued that increasing costs since the National Commission report have triggered a second wave of reform, centering on the compensation of permanent partial disability.(2) A number of jurisdictions have reassessed or changed their criteria or procedures for permanent partial benefits, including Florida, which implemented fundamental reform in 1979. Despite their importance as an element of compensation costs, there is little research examining the factors that influence the probability and costs of a permanent partial disability claim. This article explores three issues related to permanent partial disabilities. First, the process determining whether a claim becomes a permanent partial disability is modeled, as is the process determining the size of the permanent partial disability award. In particular, I estimate the extent to which each of these processes is affected by claimant moral hazard. Second, alternative empirical specifications of these processes are compared, one which assumes that the process determining the probability of permanent partial disability is identical to the process determining the size of the permanent partial disability award, and another which assumes that these two processes are different. (In this article, the probability of a permanent partial disability is estimated using a sample of injured workers rather than a sample of all workers. Therefore, the probabilities estimated in this study are not unconditional probabilities, but are conditional on a compensation claim having been initiated.) Finally, based on these results, estimates of the elasticities of permanent partial disability claims and costs with respect to changes in benefits are obtained. The next section of this article describes relevant aspects of workers' compensation programs; it is followed by a discussion of the potential effect of claimant moral hazard on the probability and size of a permanent partial award and a review of the empirical literature. …

More on the properties of a tax cum subsidy pollution control strategy

A modification in a tax cum subsidy pollution control strategy proposed by Yohe and MacAvoy to mitigate against the effects of moral hazard on the effectiveness of self-reporting strategies is shown capable of eliminating the dead weight welfare loss of regulating the emissions of an imperfectly competitive polluter.

On the potential for private insurers to reduce the inefficiencies of moral hazard

The presence of moral hazard gives rise to inefficiencies in insurance markets. In two recent papers (Arnott and Stiglitz [I9861 and Greenwald and Stiglitz [1986]), these inefficiencies provide the impetus for an analysis of government intervention to improve welfare. The implications of this analysis are that government should tax those goods that increase expected insurance claims while goods that decrease expected claims should be subsidized. Such Pigovian-type taxes improve welfare when there is moral hazard because each consumer ignores the effect of his consumption of these goods on the average cost and, hence, the price of insurance for all consumers. The purpose of this paper is to examine the potential for insurance firms privately to provide these subsidies/taxes that mitigate the effects of moral hazard (Deere 1988, unpublished manuscript). Private insurers have a strong incentive to increase profits by subsidizing the purchase of goods that reduce expected claims. A biannual dental exam is an example of such a good that is routinely subsidized by insurance firms. There is a similar incentive regarding goods that increase expected claims. Though insurance firms cannot levy a private tax, they can effectively increase the price of such goods by making the premium depend on the purchase of these goods. Higher rates for smokers is a common example. Given such strong incentives, what limits the effectiveness of these private actions in reducing the inefficiencies of moral hazard? One obvious difference between private subsidies and premium surcharges is that a surcharge requires insurance firms to monitor consumption, which limits their usefulness. There are also, however, limits on the use of private subsidies. A subsidy to a policyholder will not reduce expected claims if the policyholder resells the good. If all firms but one give a subsidy, then the price in the resale market will be the subsidized price. The remaining firm could thus enjoy the benefits of a subsidized good-reduced claims-without bearing the cost of a subsidy. Hence, a successful subsidy scheme will involve goods that are not easily resold. Given the limitations imposed by resale, are private subsidies very common? The subsidized dental exams mentioned above are an almost perfect example of

Insurability and Moral Hazard in Agricultural Insurance Markets

AbstractPareto‐optimal and constrained Pareto‐optimal all‐risk insurance contracts are studied. Conditions required for emergence of competitive insurance markets are isolated and discussed. Full insurance contracts are shown to be dominated by contracts involving coinsurance and deductibles if insurers are pseudo‐risk averse. The effect of moral hazard on all‐risk agricultural insurance indemnity schedules is examined. Results for indemnity schedules under moral hazard and constant absolute risk aversion show that providing farmers with the incentives to take appropriate actions may imply lower deductibles in the presence of moral hazard than in the absence of moral hazard.

MORAL HAZARD AND CAPITAL BUDGETING

AbstractIn this paper, the effect of moral hazard on capital budgeting is examined. It is shown that moral hazard may change project rankings based on net present value under perfect information. It is also shown that in certain agency relationships moral hazard increases managerial contracting costs more for projects with slower paybacks, thus producing a bias in favor of projects with faster paybacks. This effect manifests itself only under specific conditions.

An Empirical Analysis of Moral Hazard and Experience Rating

For many years, economists and actuaries have studied multiperiod insurance contracts independently and differently. The aim of this article is to reduce the gap between empirical studies on the determination of insurance premiums and theoretical studies on moral hazard and experience rating. The first objective is to verify empirically the proposition that past experience is a good predictor of risk by using data from a random sample consisting of 19,013 car drivers in Quebec. The second objective is to construct a multivariate, multiperiod pricing formula for automobile insurance in order to reduce the ill effects of moral hazard. Copyright 1989 by MIT Press.

Estimation of the effects of adverse selection and moral hazard on income-contingent loan plans for professional and graduate students

The increasing repayment burden of conventional student loans and the rapid growth of attendance costs are concerns that should spark renewed interest in income-contingent loans, especially for students in high-cost graduate and professional programs. This paper provides a model of the demand for income-contingent loans that can be used to estimate the possible effects of adverse selection and moral hazard on the financial viability of income-contingent loan plans. Simulations based on the loan-demand model are presented for medical students, and the results are discussed in terms of alternative options for reducing the effects of adverse selection and moral hazard.

A Laboratory Investigation of the Moral Hazard Problem in an Agency Relationship

Recent developments in agency theory have focused on the moral hazard problem in single-period and multiperiod models. In particular, the literature has emphasized how alternative institutions (e.g., liability rules and long-term contracts) can mitigate the adverse effects of the moral hazard problem. In this study, we use laboratory markets to examine the ability of two such institutions to remedy the adverse effects of moral hazard. We begin by presenting one set of markets with no liability rule from DeJong, Forsythe, and Lundholm [1985], hereafter DFL, where the effects of moral hazard were examined in a market for a service with a hidden characteristic; that is, the principal could not distinguish between shirking and chance as causes of an unfavorable outcome.1 The study showed that moral hazard led to shirking, and while

Moral hazard, adverse selection, and the optimal provision of social insurance

The single-period social insurance model of Diamond and Mirrlees is extended to allow for a diversity of types (in the probability of becoming disabled). When individual type is observable, the utilitarian optimum has both consumption when working and disability benefits increasing with the probability of disability. When type is not observable (adverse selection is present), the optimum is a single ‘pooling’ policy over a wide range of welfare weights which includes the utilitarian case. These results also provide insights into the potential distributional effects of moral hazard and the ways moral hazard and adverse selection problems may interact.

The Logic of Moral Hazard: A Game Theoretic Illustration

When individuals behave differently in the presence of insurance than in the absence of insurance, the problem faced by the insurer is known as moral hazard. There are several ways moral hazard can manifest itself in individual behavior. Insured individuals may exercise less caution (e.g., smoking). When health care resources are required, insured individuals may seek professional intervention at a lower level of illness severity, demand a higher quality of care, or not shop as carefully for least cost providers as uninsured individuals. Dionne (1981) provides a review of the different types of moral hazard and the effect of moral hazard on search activity. An underlying theory of health economics holds that an individual tends to view health insurance premiums as exogenously determined sunk costs unaffected by consumption of additional health care resources. Individuals view premiums as sunk costs because they are paid at regular intervals during the year, not at the time health care services are purchased. Individuals view premiums as exogenously determined because premium quotations are based on group-experience rates, not the specific health expenditure record of the policyholder. Individuals of an experience rated group participate in an n-person game. The purpose of this paper is to provide a simple illustration of the problem of moral hazard within the context of n-person games. The rational choice for any individual is overutilization of health care resources. The illustration also shows that even if individuals take into account the effect of their own consumption on premiums they will still choose not to conserve. A solution based on merit rating is proposed.

The Risk Element in Occupational and Educational Choices

The study contains estimates of the coefficients of variation of income of scientists by age, level of education, and type of employment. The source of data is the 1966 National Register of Scientific and Technical Personnel. The analysis shows that the coefficient of variation tends to decrease as the level of education increases, and to be higher in private industry than in government or educational institutions. Incomes of scientists are found to be lognormally distributed. Estimates of the rate of return to education, which take into account risk differentials, are derived.